One Move That Can Save You 20% A Month.

Have you ever tried to climb a descending escalator? Maybe when you were a kid? If you haven’t, I urge you to give it a try!

Climbing a descending escalator is hard. If you try to walk up it, for every step up you take, you’re pushed a step down. To gain any ground you have to run up the stairs! It gets tiring quickly.

Climbing a descending escalator is an apt metaphor for our financial lives.

We are forever stuck on the escalator, climbing and climbing. The constant motion of the stairs working against us is the never-ending expenses that keep recurring month after month. In order to keep pace, we must earn enough to meet these recurring expenses. Earn a buck, spend a buck. One step up, one step down.

There are two ways to gain ground up the escalator:

We can strengthen our legs and start running, i.e. we can earn more income.

We can slow the pace of the escalator, i.e. we can lower our expenses.

Pretend for a moment that earning more income is not possible. Cutting expenses is your only option. What can you cut down? Perhaps you can drink fewer Starbucks Macchiatos. Ride your bike to work one day a week rather than drive. Don’t go out for beer after work on Thirsty Thursdays.

These options are all fine. In fact they are choices many of us already make when we are trying to save money. But they are all so trite. Yes, a few dollars here or there will add up quickly, but I know of cutting one expense which can save you 20% of your take home income per month: Housing.

Back in 2014, my fiancé and I were living in an apartment that cost us 50% of our take home pay. After our other fixed expenses, this left very little for saving, investing, and otherwise enjoyment of life. When it came time to renew our lease our landlord asked for a 20% increase in rent! (That’s the Bay Area for you). If we had chosen to stay, we would have been paying 60% of our take home income on housing expenses!

We were not a household in poverty. But spending 50% or more of your income on housing is defined by The Department of Housing and Urban Development (HUD) as a severe housing burden, and is often a marker of poverty.

To be candid, anything that is a “marker of poverty” I try to steer clear from. The first five years of my life out of college was borderline poorhouse, and I wish to never experience that again! So, to see half of our income disappear on rent every month really rubbed me the wrong way. When the landlord told us we needed to pay even more… Well, we weren’t about weigh ourselves down with that burden.

What does the HUD deem to be an “appropriate” level of housing expense? Well –

30% of take home income is the rule of thumb.

With this rule in our minds, my fiancé and I set out to find a different housing option. It turns out, in the Bay Area, California, we couldn’t find anything that “cheap”. So, instead, we decided to spread the cost of housing among more people; we decided to find some roommates.

It was hard, going from living alone to living with roommates again. There can be friction in the house when one person likes to go to bed at 8:30pm, and another person likes to throw raging parties until 4am. We certainly had to make some adjustments to our expectations. But we were able to knock down our housing costs to about 30% of our income. We were able to save an extra 20% of our take home pay after we moved. This was huge!

In some ways this was an easy choice. It felt good to save money, to start accumulating rather than just watch the money I earned come in one day and go out the other. But in other ways it was a very hard choice.

As of this writing I‘m almost 34-years-old. I work as an investment manager in San Francisco freaking California. I manage millions of dollars for investors. I shouldn’t need to live with roommates in order to afford a place to live.

In other words, I’m an adult. Isn’t part of #adulting being able to make it on one’s own?

But places to live cost a lot down here. Some of my fiancé’s coworkers spend upwards of $4,000/month just to live near work in Palo Alto (two-bed apartment – they’re raising a family; they are really #adulting). In San Francisco, that same apartment would cost $4,500/month! If you are going to follow the 30% rule and spend $4,500/month on rent, you’d need to earn $15,000/month, after taxes. In San Francisco, this equates to a pretax income of roughly $300,000 a year!

CAN THIS GET ANY CRAZIER?!

The reality is, most aren’t earning $300,000 a year. Most aren’t following the 30% rule. They aren’t even following the 50% rule. It’s much worse than that. This is why it can be very hard to get ahead in high cost areas, to gain any ground on that escalator. But these people are willing to pay the extra cost to live in The City, or live in Palo Alto, or any other high-demand area. It’s just not a cost I’m willing to pay. Some may see the value in living in “the right neighborhood”, or living within walking distance of work. I’m just not there yet.

If you’re like me, if you try to steer clear from money traps and headwinds, if you’re trying to hustle your way up! that escalator,

move to a less expensive place to live.

Get some roommates. Move to the burbs, away from the city. Commute if you have to. If you’re spending 50% of your income on rent, imagine what it would be like saving an extra 20% of your paycheck every month! You don’t even have to save it all! Heck, spend 10% and save the other 10%, and you’ll still come out ahead!

If you choose to spend upwards of 50% of your income on housing, that is your choice to make. But know that climbing the financial escalator will be that much more challenging. Because rent and mortgage payments tend to be the highest fixed cost in our budgets, it is by lowering that cost that you can make the quickest impact on your ability to save and invest.